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Esprit Turnaround Expected to Yield First-Half Profit

Eighteen months ago, Esprit Holdings Ltd. (stock symbol 0300.HK) began to implement a set of turnaround strategies designed to help return the company to growth and profitability. A new CEO was named, operating costs were slashed, and underperforming stores were closed.

The strategies appear to be working. For the six months ended December 31, the company is expected to report a profit of at least $HK 90 million, or $US 11 million, compared to a loss of $HK 465 million ($US 60 million) in the prior year period.

That was the good news. The bad news is that most of the improvement was a result of drastic cost-cutting. Sales in the six months from July to December 2013 declined an estimated 19 percent from the same period in the prior year, indicating the company still has a long way to go to meet its goal of revitalizing sales.

Sales at Esprit have been on a decline since 2008. Total net revenue for the most recent fiscal year, which ended in June 2013, were $HK 25.5 billion (about $US 3.3 billion), down 14% from 2012. For the first time since going public in 1993, the company posted a net loss in 2013, of $HK 4.4 billion ($US 570 million).

Macroeconomic conditions in Europe, where Esprit does 78 percent of its business, have contributed to the decline. Unemployment remains stuck at over 12 percent in the region. Competitive pressures from larger, cheaper fast-fashion competitors like H&M, Zara and smaller, nimble specialty stores like Mango have disrupted the entire department store sector. The number of wholesale customer doors in Europe selling Esprit declined from 9,700 in June 2012 to 8,300 in June 2013, resulting in a 13 percent drop in net square meterage. Esprit’s owned retail sector has been difficult as well: although the company opened 12 new stores in Europe in the year, bringing the total to 370, it suffered a 3.3% drop in same-store sales in the period.

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Sales in Asia have become a larger piece of the business, growing from 14 percent of total sales in 2010 to 20 percent in 2013. China is the company’s third largest market, at 9 percent of sales, after Germany with 44 percent and Benelux with 13 percent. It is in China that the company feels it has the most opportunity, and where it hopes to direct more of its resources now that the turnaround is underway. The company opened a China design center to better localize product for the Asian customers.

1980s Esprit Ad

Esprit’s California Roots

Founded in 1968 by Susie and Doug Tompkins, who launched the company in their San Francisco apartment and first sold clothes out of their VW bus, Esprit was at one time the fastest growing apparel brand in the world. The brand’s unique designs with streamlined silhouettes in mix-and-match patterns and bright colors caught on quickly with consumers. Between 1978 and 1986, sales grew from $100 million to $800.The company was unique in a couple of other ways as well. Its concern for employees led it to be known as one of the best apparel companies in which to work. Margot Lewis, President of brand consulting firm Platform Media NY, and former Vice President of Marketing for Esprit, remembers it as a great place to work. “The company was a true pioneer in the way it treated its employees. The building was beautiful, there was a cafeteria with a chef who made organic food, there was yoga at lunch time…what Google is known for now Esprit was doing then.”

Esprit’s environmental consciousness was also ahead of its time.  Co-founder Doug Tompkins ended up leaving Esprit in 1989 to become a full-time conservationist when he reportedly became troubled over the environmental impact of the fashion business.

The Turnaround

Jose Manuel Martinez Gutierrez, who became CEO in September 2012, was formerly an executive at Zara parent Inditex, but reportedly does not intend to evolve Esprit into a fast fashion retailer. According to the company, Esprit’s target market , the thirty-something woman who demands quality and value, is a little older and more affluent than the typical fast fashion customer in her teens and twenties.

However, Mr. Martinez has apparently begun to use his experience to improve Esprit’s supply chain efficiency, and has shortened its product lead times from six months to three, allowing it to better respond to fashion trends. Esprit is reportedly taking major steps to focus on quality, design and both the in-store and online customer experiences, to differentiate the brand from Zara and other cheap and chic brands. The head of product development was replaced in 2013 by another former Zara executive, Rafael Pasto Espuch. Denim and lingerie lines have been introduced, and licenses for products that were brand dilutive discontinued. Esprit has developed a new store concept, called the Lighthouse, which has resulted in continued performance improvement in the freestanding stores in which it has been introduced.

The Secret to Top-line Growth

Esprit’s next steps will be to better leverage its new initiatives into top-line sales growth.  Part of that work may involve a repositioning of the Esprit brand itself. In 2012, then-CEO Ronald Van der Vis said that Esprit had “become a safe brand, even a slightly boring brand.” A company filing in 2011 said it had “lost its soul.”

Spring 2014 Style

According to Platform Media’s Lewis, Esprit was at one time one of the most recognized brands in the industry, considered “happy, modern, irreverent, spirited, and fun.” However, in recent years its products had strayed from the brand’s fun, happy, California roots, becoming “a cross between serious sportswear and career wear.”Esprit’s product lines are designed at its headquarters in Germany and China, two places that are as geographically and attitudinally far from California as one can get. The brand is not even available in the states: all of the company’s North American retail shops and wholesale accounts were closed in 2012. Company representatives maintain that “the brand’s future is in China, not the U.S.”

Although its retreat from America, Esprit’s original market, has detracted from its positioning as a California Lifestyle brand, in a couple of other key ways, Esprit is closely adhering to its heritage. The company has joined Better Work, a partnership to ensure that its factory workers around the world are treated and paid fairly.

It has also joined a group called ZDHC (Zero Discharge of Hazardous Chemicals) to help remove hazardous chemicals from the apparel supply chain. As part of the initiative, it has waste water from around thirty of its suppliers in China tested for the presence of harmful chemicals. If chemicals are found, improvement steps are taken.

Lighthouse Concept Store (Germany)

Esprit plans to open up more of its “Lighthouse” concept stores in the next few years. The first ones, opened in Cologne, Dusseldorf and Antwerp, are bright, airy and environmentally green, a deliberate nod to the brand’s California lifestyle roots. Product is displayed on shelving made of bamboo wood and braided reed. The space is accented by handcrafted ceramic pieces and photographs of the California landscape. Key style elements of the concept stores are also being introduced in its shops in China.

Over the next year or so, the company plans to focus on growing sales and gaining share, particularly in Asia. Competition is already intensifying in the region: Gap plans to have eighty stores opened in China by year-end. Although small in comparison to Esprit’s more than 350 freestanding stores in China, its rapidly expanding Asian footprint and identity as an iconic and authentic American apparel brand may present a tough challenge for Esprit.